From “The Rule of Nobody”

We mentioned Philip K. Howard’s new book “The Rule of Nobody” the other day. Here’s another excerpt (which also appeared in the Wall Street Journal’s “Notable and Quotable”:

The 2009 economic stimulus package promoted by President Obama included $5 billion to weatherize some 607,000 homes—with the goals of both spurring the economy and increasing energy efficiency. But the project was required to comply with a statute called the Davis-Bacon Act (signed into law by President Hoover in 1931), which provides that construction projects with federal funding must pay workers the “prevailing wage”—basically a union perk that costs taxpayers about 20 percent more than actual labor rates. This requirement comes with a mass of red tape; bureaucrats in the Labor Department must set wages, as a matter of law, for each category of construction worker in each of three thou- sand counties in America. There was no schedule for “weatherproofers.” So the Labor Department began a slow trudge of determining how much weatherproofers should be paid in Merced County, California; Monmouth County, New Jersey; and several thousand other counties. The stimulus plan had projected that California would weatherproof twenty-five hundred homes per month. At the end of 2009, the actual total was twelve.

One Comment

Mr. Howard is a hero to me, but he is too simplistic with respect to the Davis Bacon Act.

One thinks of economics in terms of equilibrium. If a price is too high,-sales drop; too low, shortages. But when there is a substantial gap between average costs and marginal costs, the property of equilibrium breaks down. This is clear when there is bidding for a large project. If you don’t win the bid, you have the costs of carrying idle equipment and some payroll costs. Thus bidding tends to insufficient prices. It is that property that leads to collusion. The garbage trade has low marginal costs for an additional stop on a route, but the average cost has to cover the costs of trucks, garages, landfill development, etc. and we get organized crime in the garbage collection industry. At least that used to be true.

There is a pseudo equilibrium in firms failing, leading to monopoly, and monopoly is the ultimate collusion.